Interesting exchange in this paper on momentum by Man. The response by Nick Barberis, professor of Finance at Yale, is of particular interest given that conventional wisdom is that momentum stocks are often “overvalued.” According to his response, that momentum stocks are often rising for the very reason that they are “cheap.”
AHL/MSS: Do momentum investors do harm because they do not follow fundamental information?
Doug Greenig: If there are too many momentum investors relative to fundamental investors, capital allocations might get out of whack.
Cam Harvey: Policy makers might choose fundamental traders over momentum traders as value trading moves prices to where they should be, whereas momentum might move them away. Prices moving away from fundamental values could have a social cost. At the same time, momentum traders are good for providing liquidity.
Sandy Rattray: Value investing feels right. It’s a good thing to be doing. Finding cheap stocks is seen as a valuable skill. A value investor is seen to stand on higher moral ground than momentum investors.
Nick Barberis: But value and momentum may be more similar than they appear. According to under-reaction theories of momentum – for example, the slow diffusion of information theory – a stock that has been trending up is also a cheap stock: not all information about it has been absorbed into the price.
HT: Jerry Parker
